Keynesian Budgets Threaten Recovery; H. Sennholz

Government expendituresof such magnitude are simplytoo big to be ignoredor taken lightly. They are felt not only throughout the American economybut alsoalloverthe globe.Afterall,they may affectthe valueof the U.S. dollarwhichis the standardmoneyof the world,usedwidelyby gov ernments,corporations,and individuals.U.S. gov ernment spendinghas pocketbook effectson all continents. Federal legislatorsand administrators appar ently cannot free themselves from the spell of Keynesianism.It has such a compellingattraction because it elevates to good economicsthe thing theyliketo do most-spend otherpeople'smoney. Keynesianismpermits administratorsto yield to any and all spendingpressuresby Congress,and encouragesthemto take the leadin new spending Dr. Sennholz heads the Department of Economics at Grove City Collegein Pennsylvania. initiatives. It confers respectability on political profligacy. Unfortunately,governmentspendingdoes not sustain,stimulate,or invigoratean economy.On thecontrary,it divertseconomicresourcesto many unproductiveusesand therebyaggravatesa reces sion. Boostsin spendingallocatemore resources to the ever-growingbureaucracyand the favorite recipientsof Federallargess.This is why the Fed eralbudgetsmay actuallydeepenand prolongthe presentrecession.

The budgets propose higher expenditures on preschool education and preparation of low income Americans for higher education. They seek more funds toward the reduction of illness anddeathfrompreventablediseases.Theyrecom mend a sizeableincreaseof Federal spendingfor researchand development,with specialemphasis on basic research, high performancecomputing, andenergyresearchanddevelopment.Theyargue for more Federal spending on highways and bridges,on airports, theair trafficcontrolsystem, and the explorationand use of space.They pro pose to spend more for the expansion and improvementof national parks, forests,wildlife refuges,and other publiclands.They call for fur therincreasesin Federalspendingon drugpreven tion,treatment,andlawenforcement.Theywould substantiallyraiseFederaloutlaysto helpthe Fed eral Bureau of Investigationfight crime,Federal prosecutorsprosecutecriminals,and the Federal prisonsystemaccommodatemoreconvicts.

To finance the additional spending of $194 bil lion, the budgets envision $133.7billion in new tax receipts, user fees, and other collections; the $60.3 billion shortfall is added to the deficits estimated at $318.1billion in 1991 and $280.9billion in 1992. Altogether, they probably will exceed $600billion. The Seenand the Unseen Yet despite such massive consumption of eco nomic resources, nowhere do the budget docu ments reflect on the obvious reduction in econom ic well-being that Federal taxation and deficit spending inflict on their victims. Nowhere do they mention a $194 billion reduction in individual income that prevents people from spending money for preschool education and preparation for higher education, for the fight against illness and death from preventable diseases, for research and development, for drug prevention and treat ment, and so on. Governmentspendingalwaysis presentedas a benefit withoutcost, a grand addi tion to the generalwelfare,a socialachievementof the highestorder.

This popular view of government spending not only springs from the old predilection of politicians for spending other people's money but also draws support from man's natural inclination to prefer the seen over the unseen. Government largess is visible to all in the form of various benefits, lucra tive contracts and privileges, and public buildings, many of which look like Greek temples built to the gods. What is not seen are the costs borne by mil lions of people who were forced to do without preschool and higher education, who no longer can afford medical services or purchase health and life insurance, who must forgo better housing and warmer clothing. The marble temples of politics which may last a thousand years are durable mon uments to the supremacy of political power over individual freedom and economic prosperity. To a thoughtful person, they speak of onerous taxation and painful extractions that greatly aggravate the plight of the poor.

The Keynesian call for a sharp rise in Federal spending as an antidote for recession is neither thoughtful nor helpful; it completely misinterprets the causes and consequences of recession and, therefore, prescribes the wrong medicine. A reces sion is a time of readjustment and recovery when businessmen correct the mistakes made in the past 255 and put their houses back in order. It is an integral part of a business cycle that begins with a boom, leads to a bust, and ends with recovery. If, for any reason, government prevents the readjustment or even promotes more maladjustment, it makes matters worse. In the end, the recession may turn into a deep depression, just like the Great Depres sion during the 1930s. The present recession had its beginning during the 1980s when the Federal Reserve System, the monetary arm of the government, ignited a boom with numerous bursts of new money and credit.

It helped finance Federal budget deficits of nearly $2 trillion, permitting the Federal debt to rise to $3 trillion, plus approximately $1 trillion in agency debt and off-budget guarantees. It rushed to the rescue of many governments of Third World and former Communist countries which incurred and now labor under $600 billion of foreign debt. The Fed kept alive hundreds of banks and S&Ls suffer ing in the vise of regulation and inflation. Helping to build large pyramids of junk-bond debt, it facil itated a great takeover game that enabled promot ers and speculators to assume control over giant corporations. Banks amassed $700 billion in loans for mergers and acquisitions and another $700 bil lion in loans on real estate. The Fed even financed the rescue of various corporations and city govern ments chafing under heavy loads of political debt. Duringthe 1980stotaldebtnearlydoubledto an estimated $12 trillion, much of which is of low quality.The growth of debt did not lead to eco nomic growth; instead, it facilitated government handouts and corporate mergers, acquisitions, and leveraged buyouts. It caused real estate and stock prices to rise dramatically, while economic output, according to the Tax Foundation, stagnated, and median average income after direct Federal taxa tion and inflation declined by 9.2 percent.

Recoveringfrom Recession A recession or depression is a cleansing affair that exposes mistakes and manipulations and calls for corrections and remedies. The present reces sion is the inevitable consequence of the moun tains of unproductive debt that financed many ill advised ventures and now weighs heavily on the debtors. It will end as soon as the debt burden has been reduced to a more bearable level. Debt relief may come through bankruptcy and rescheduling, 256 THE FREEMAN • JULY 1991 write-offs, and payoffs. The end may be in sight when fallinginterest rates signal not only a decline in lending risk, but also the arrival of new savings in the market. Under the sway of Keynesian thought, many politicians and officials are determined to hasten recovery through deficit spending and money cre ation, which they call "contra-cyclical." Actually, their policies are "contra-recovery"; they aggra vate and prolong the recession by consuming cap ital en masse, crowding out busiIiess,and depress ing business activity. The currency and credit expansion falsely lowers interest rates, which again misleads businessmen in their investment decisions. In short, government deficit spending and money manipulation are the most potent recovery suppressors.

The present recession may prove this point. When Federal deficits are made to swell to unprecedented levels while the recession deepens and lingers on, the Keynesian model obviouslyfails to demonstrate economic reality. It misinterprets the causes of recession and, therefore, prescribes a wrong medicine, in fact, a very harmful medicine. There are three types of people in the world. Some learn (rom their own mistakes-they are experienced and wise. Others learn from delibera tion and observation of the experience of oth ers-they are diligent and intelligent. The third type learns neither from their own experience nor the experience of others-it comprises the fools. The severity and length of the present recession will clearly reveal which type of legislator and administrator is holding forth in Washington. 0 257 A Report from theWorld of Suggestive Looks by Jack Matthews R ecently I was sadly amused by a front page story in the student newspaper of the university where I teach. This article fea tured the report of our Assistant Director of Affir mative Action in which sexual harassment of female faculty and administrators was found to be a serious and continuing problem on campus.